That money in your 401(k) retirement account can look very
appealing when you're trying to finance your new startup.
There's a balance in there, it's already your money, and
you feel like it's the quickest way to get your business off
the ground.

Using her 401(k) account was a successful move for Abbey Branch,
founder and creator of the Abbey Branch line of trendy handbags that meld
fashion, art and architecture. While working as a sales rep for a
wall-covering manufacturer, she decided to start her own company.
To launch her brand, she felt she needed a substantial amount of
startup capital. She already had a prototype and a few interested
investors, says Branch, 32, "but I had this gut feeling that
with that would come unrealistic expectations." After some
soul-searching, she decided she could make back any money she took
from her $55,000 401(k), so she used the entire amount and paid
$10,000 in penalties. The cash infusion helped her start
manufacturing and build her website in 2003 from her Spring, Texas,
locale.

The penalty fees for early withdrawal from a 401(k) account can
be steep, so entrepreneurs need to think long and hard about the
pros and cons of this financing choice, says Jordan E. Goodman,
founder of MoneyAnswers.com and author of the Everyone's Money Book series. If
you've left your job and you've got a 401(k) balance, you
can roll it into a rollover IRA and take out the balance, says
Goodman, but you'll have a 10 percent penalty (if it's
before age 59 and a half), and you'll have to pay federal and
state income taxes. If you're still at your job, you can borrow
up to $50,000 against your 401(k) and set up a payment schedule
from your paycheck--though if you leave your job, voluntarily or
involuntarily, you'll have to pay all the money back in 60 days
or face penalties. "Be sure that this entrepreneurial
opportunity is going to work for you," says Goodman.
"Because if it blows up, you've still got to pay the loan
back, and you've hurt your retirement."

Luckily, Branch was able to pay her money back within her first
year. Her startup cash infusion enabled her to roll out her handbag
line and get it noticed by big names like Victoria Beckham,
Courteney Cox and Nicky Hilton, to name a few. Branch projects 2005
sales to hit $500,000.